Building your own stock portfolio – Identify sectors after choosing businesses

In the last post we saw how you could identify businesses at a conceptual level for your future investments. Once you have done this, you can decide next on the sectors that you want to invest in. While at times there will be a one-to-one mapping between the business and the sector, in most cases the mapping is really one-to-many.

In practical terms, you could go to a website such as HDFC Securities to look up the different sectors and the companies in it. Let us assume that you have identified Aviation as a business and want to look at possible sectors in it. First go to the link here and look at the possible sectors linked to the business of Aviation. This may take a little time but it is fairly easy to do. In this case the obvious choice is the sector Air Transport Services.

In case you have chosen Real Estate as the business that you would ideally like to invest in, things get a little more complicated. There are several sectors that you can now choose from. Some of these are : Construction, which deals with companies actually into building houses etc; Cement and Cement Products, which will be required for building houses; Realty which deals with overall RE business; Ceramic products which will be required for building houses; Glass products which will be required for building houses and so on. You would have got the point by now.

Now, assuming you are building a portfolio for the first time, my recommendation will be that you stick with the more common sectors where there are well known companies doing business for a length of time. While, there are risks with all businesses and companies, the chances of any large scale downturn in these sectors and companies are limited to a degree. As we saw in the last post the consumption theme is likely to play out strongly in the Indian markets for the foreseeable future, You can choose sectors based on this to begin with. Use the list from HDFC Securities to identify your sectors.

Here are some of the sectors that will be my recommendation for starting off with a first time portfolio. Of course, people who have not been investing in an organized manner, can also realign their portfolios based on these.

• Automobiles : The demand for more cars and newer types of cars are only going to grow.
• Banks : The increasing population base will need increased scale and levels of banking services.
• Capital Goods : Urbanization and increased rural demand will act as a catalyst to this sector.
• Consumer Durable : Consumption here will be linked to better lifestyles as economy grows.
• Electronics : A lot of future infrastructure and consumer products will depend on this sector.
• FMCG : An evergreen sector that will continue to do well.
• IT : Though there are challenges here, several Indian companies have shown leadership.
• Logistics : With greater economic activities and E-commerce this sector is a sure bet.
• Media : A relatively new sector, poised for significant growth in future.
• Pharmaceuticals : Another evergreen sector with great Indian companies.
• Construction / Realty : These will do well with enhanced infrastructure build-up.
• Textiles : The consumption story will get reflected positively here.
• Telecom : Already a high growth sector, future looks bright too.
• Education : Serious growth potential in online and offline education.
• Refineries : Profitable sector with captive demand, will only do better in future.

Of course, there are other associated sectors that can be chosen too. For example, Automobiles can be connected with Auto Ancillary sector and the Tyre sector etc. However, to begin with it will be a better idea to stick with the main sectors rather that go into secondary ones. As time goes by, you can definitely look at those too.

So which are the sectors that you will choose? I think to start with, 6-8 sectors are enough for a first time portfolio. You should be investing in these sectors over a period of 2 years or so to build up a basic portfolio. Once that is done, it is really a case of maintaining it and reviewing it annually. As time goes by you can add more sectors and companies but do remember that you will need to keep the ground rules discussed here.

Your task now is to read up more on these sectors and come to a conclusion on what your selection is. Remember, you will not reinvent the wheel and also that you are looking at a long term portfolio. A sector looking weak today but having great future potential may well be a best bet.

In the next post we will get down to selecting individual stocks in these sectors.

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